MAG 202 1st EditionExam # 1 Study Guide Lectures: 1 - 12Chapter 1 (Lectures 1-4)Manufacturing Costs: all costs incurred inside the factory associated with transforming raw materials into a finished product - Direct Materials: materials that become part of product & costs can be traced to product - Direct Labor: “touch labor”, must be a part of making product - Manufacturing Overhead: rest of costs except DM & DL, includes indirect mat. & laborNonmanufacturing Costs: a firm’s other costs, everything that happens outside of production- Selling Costs: all costs incurred to sell product & deliver to customer - Administrative Costs: all costs associated w/ general management *The matching principle: if a cost is incurred to make something that will be sold, then the cost should be recognized as an expense only when the sale takes place-when the benefit occurs. These are called-product costs. Product Costs (Inventoriable Costs) - All costs involved in acquiring or making a product- Manufacturing Costs: DM, DL, & MOH- Assets in inventory, become an expense once items are sold- Inventory (Balance Sheet) → COGS (Income Statement)Period Costs- Everything that’s not Period Costs, all Selling & Administrative Expenses - Not included as part of costs of inventories - Expensed on Income Statement in period incurredPrime Cost = DL Cost + DM Cost Conversion Cost = DL Cost + MOH Cost (these costs are incurred to “convert” raw materials into finished product)Cost Behavior: how a cost will react to changes in the level of activity Variable Costs: total costs change in direct proportion to changes in activity level- DM- DL- Sales CommissionsFixed Costs: total costs remain constant, regardless of activity level- Rent- Depreciation- Administrative Salariesvariable cost per unit ×Total Cost=Total¿Cost+Total VariableCost (¿of units)Average Cost=TotalCost ÷ ¿ of UnitsCost Object: any item for which costs are measured & assigned Direct Costs: can be easily & accurately traced to cost objectIndirect Costs: CANNOT be easily traced Opportunity Cost: the potential benefit that is given up when one alternative is selected over anotherSunk Cost: already been incurred costs, can never be changed, should be ignored Chapter 2 (Lectures 5-7)Job-Order Costing: used in situations where many DIFFERENT products are producedA job cost sheet records the DM, DL, & MOH costs to that job. Materials Requisition Form → DMEmployee Time Ticket → DLMOH cannot be traced so, an allocation base (DL hours, Machine hours) will be used to assign MOH to individual jobsMOH Application1. Select a cost allocation base2. Compute the Predetermined Overhead RatePOHR=Estimated Total MOH CostEstimated TotalUnits∈Allocation Base3. Apply OH to Individual Jobs Overhead Applied=POHR(¿2)× Actual Activity (¿1)POSITIVE: Using a POHR makes it possible to estimate total job costs sooner.NEGATIVE: It can create complication because the Applied MOH doesn’t equal the Actual MOH! An end of period adjustment is needed.Underapplied OH =Applied OH < ActualOHOverapplied OH = Applied OH > Actual OH*REVIEW journal entries & T-account for costs incurred in this chapter. See Chapter 2 slides 24-34, it will be on the exam. Chapter 3 (Lecture 8)Activity Based Costing- assigns OH costs more accurately to products - works exactly like Job-Order Costing - uses a lot of allocation bases & predetermined OH rate for each activity Activity Cost Pools: a cost bucket where costs related to a particular activity are accumulatedActivity Measure: expresses how much of activity is carried out & used as allocation base for applying OH costsPROS-improves accuracy of product costingCONS- COSTLY!ABC shifts costs from… HIGH volume products in LARGE batches → LOW volume products produced in SMALL batchesWhat does that mean? - The cost of products that are produced in smaller batches will INCREASE. - Whereas the cost of products produced in larger batches will DECREASE. So…if I produce 10 cookies & 1,000 cakes, which product’s unit cost will INCREASE/DECREASEafter using ABC?Cookies unit product cost will INCREASE because I only produce 10.The unit product cost of the cakes will DECREASE because I produce so much more! Chapter 4 (Lectures 9 & 10)Job-Order Costing- Many different products in each period- Made to order, unique - Example: large scale construction Process Costing- Producing many units of a single product - Each unit being identical - Example: Coca Cola bottles - THINK: what would Coca Cola do?Similarities between Job-Order & Process Costing 1. Both assign DM, DL, & MOH2. Use same accounts3. Flow of accounts is always the sameDifferences in Job-Order & Process Costing1. Type of product 2. Process accumulates unit costs by department & Job-Order accumulate by job*Cost Flows displayed in the power points. Be sure to have a clear understanding of how costs flow from account to account!Processing Departments- Any unit in an organization where materials, labor, or overhead are added to the product- The activities performed in a processing department are performed uniformly on all units of production- The output of a processing department are homogeneous- Products flow in a sequence from one department to anotherPartially Completed Units- A department usually has some partially completed units in its beginning and ending inventory - This can complicate the determination of a department’s output for a given period - And also complicate the unit cost that should be assigned to that department’s output - Equivalent units = number of partially completed units X % completion of those unitsCosts w/ Partially Completed Units 1. Calculate Equivalent Units of Production 2. Compute Cost per Equivalent Unit3. Calculating Inventory Costs: Ending WIP & Units Transferred Out4. Cost Reconciliation ReportCalculate Equivalent Units of Production 1. Identify the units transferred of the 1st department 2. Calculate the equivalent units in ending WIP with respect to materials = # of partially completed units X completion % 3. Calculate Equivalent Units of Production = # of units transferred out + equivalent units in ending WIP inventory 4. Repeat steps 2 & 3 for conversion costs Compute Cost per Equivalent Unit (a separate calculation is made for each cost category in each processing department)1. Identify cost of beginning WIP inventory for materials of 1st department2. Identify Cost added during the period for materials3. Calculate Total Cost for